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INTRODUCTION
From the time of the creation of the EU and euro-zone, Portugal was one of the most risky countries of the union, along with such countries as Greece and Spain. Nevertheless, in the early 2000s, Portuguese economy grew steadily and investors grew conscious of the reliability of Portugal and attractiveness of its economy. However, the economic recession and financial crisis that struck the world and Portugal in particular raise concerns about the ability of Portugal to pass through the economic crisis and increasing debt successfully or the country will sank down, when the EU eventually refuses to help Portugal or when Portugal becomes an unbearable burden for the EU.
On the other hand, Portugal is a member of the EU and the deterioration of the economic situation in the country affects other member-states of the union. Therefore, Portugal can become a grave digger for the EU, in case if the EU fails to support Portugal in overcoming its economic crisis. At the same time, the support of Portugal expands inevitably the economic crisis all over the EU because the financial support of Portugal will need substantial financial resources. In such a situation, Portugal can become an unbearable burden for the EU but, if the EU refuses to support Portugal, this decision will put under the question the future of the EU at large because its state-members will understand that they cannot count on the support of the EU in time of the economic crisis.
In such a situation, investors grow more and more concerned with the situation in Portugal and the state of Portuguese economy because it can affect their business not only in Portugal but also in the EU, but, at the same time, investors consider the possibility of launching their business in Portugal because the economic crisis may be a good time to start a successful business.
BALANCE OF PAYMENTS
In actuality, the major problem of Portugal is the misbalancing of payments. To put it more precisely, Portugal accumulated its debt and is actually keep borrowing money from the EU as well as other sources to cover its needs but the recent economic recession has undermined the economic development of the country. As a result, the country faced a considerable problem of paying off its debt. In fact, Portugal cannot stimulate the economic development because the country has to spend a considerable part of its financial resources on paying off its financial debt to the EU and other institutions. Naturally, in such a situation, Portugal faces the crisis of the balance of payments, when the debt of the country becomes unaffordable for the country. In such a situation, recently the country’s borrowing costs have soared to successive euro-era highs for 11 consecutive days (Portugal Prepares for a Bail-Out, 2011). Therefore, Portugal tends to increase its borrowings and the rising borrowing costs are natural effects of the huge debt the country has at the moment.
Nevertheless, in spite of the deterioration of the balance of payments, Portugal keeps borrowing money. For instance, recently, Portugal has been forced to pay what analysts said was a “prohibitive” interest rate of 5.9% to raise €1 billion ($1.43 billion) in one-year debt (Portugal Prepares for a Bail-Out, 2011). This means that the balance of payments of Portugal will deteriorate even more in the future. Obviously, if the country borrows money at the unparalleled, “prohibitive” interest rate today, then, in the future, the country will be just unable to borrow any more. In this regard, Portugal borrowing policies resemble a sort of bubble, which is likely to burst.
In such a context, specialists (Erlanger, 2011) trace dangerous trends, which may be interpreted as first signs of the upcoming default of Portugal. To put it more precisely, Portuguese bankers also made it clear that they would no longer keep buying up Portuguese government debt, which was approaching junk status, even if they could offload it to the European Central Bank (ECB) (Erlanger, 2011). In actuality, such policy of Portugal bankers reveal their uncertainty in the ability of Portugal to pay off its debt and they believe it to be unreasonable to lend money to the government to serve the public debt of Portugal.
In this regard, the deterioration of the situation in Portugal affects other countries of the EU and European financial institutions. For instance, the cost of insuring European sovereign debt has climbed to a record as the crisis that last year led to 178 billion euros in EU and International Monetary Fund aid for Greece and Ireland threatened to claim Portugal as its next victim (Neuger, 2011). Obviously, the further deterioration of the economic situation in Portugal and the deterioration of its balance of payments will force the EU to apply similar policies to Portugal as the EU did in relation to Greece and Ireland. In fact, the EU has to support Portugal as one of its state-members because the deterioration of the economic situation in Portugal will lead to the spread of the economic crisis throughout the EU.
In fact, the economic crisis in Portugal and the deterioration of its balance of payment have already had the negative impact on the financial market of the EU, especially its currency market. To put it more precisely, the euro, down about 10 percent against the dollar the past year, gained as expectations mounted of a stepped-up rescue effort and Portugal staged a successful bond auction. The currency rose 0.5 percent to $1.3037 (Neuger, 2011). At first glance, this effort has a positive impact on Portuguese economy as well as on the EU. However, it is obvious that the EU and the ECB as well as other financial institutions of the EU cannot always support Portugal and its economy. Obviously, if the economic situation in Portugal keeps deteriorating, European banks and the ECB will be unable to provide the financial aid and new loans for Portugal. In such a context, it is possible to presuppose disastrous effects of the refusal of European banks and the ECB from the support of Portugal. What is meant here is the fact that, if the EU refuses from the support of Portugal, European currency can drop consistently that may provoke the profound financial crisis in the EU.
Furthermore, today, the ECB holds almost £100bn of Greek debt. Portugal was in much the same position, but hoped to muddle through its crisis with just one bailout from Brussels (Imman, 2011). Therefore, if Portugal will need the similar measures to be undertaken from the part of the EU and the ECB, such support can become an unbearable burden because it will increase the pressure on the ECB consistently, while many European banks can just follow the lead of Portuguese bankers and refuse from lending their money to Portugal and this will be the major step to fast spreading economic crisis in the EU, which can aggravate the current economic situation in the EU even more.